21.1 Introduction

A liability insurance contract is a contract by which the insurer undertakes to indemnify the insured in the event of his incurring legal liability, whether in tort or in contract, to a third party. The Insurance Law defines liability insurance as “the type of insurance of which the insured subject matter is the insured's liability to indemnify a third party according to law.”1 Under the Insurance Law, liability insurance is treated as a type of property insurance.2 However, unlike other types of property insurance, liability insurance provides cover against the insured's potential legal liability to a third party, rather than against the risk of damage to property as such, and is a contract of indemnity.3 With liability insurance there are three relevant parties: the insurer, the insured, and the third-party claimant. Because of the involvement of a third party, liability insurance possesses special features as compared with first party insurance, such as the insured's prior discharge of his liability to the third party as a precondition for recovering insurance payments from the insurer,4 direct payment of insurance money to the third party upon the request of the insured,5 the third party's right to claim directly against the insurer for insurance money,6 the insurer's participation in determination of the insured's liability to the third party,7 and so on. This chapter will consider these features common to all types of liability insurance. Some common types of liability policies, such as employers’ liability insurance, product liability insurance, professional liability insurance, public liability insurance, and directors’ and officers’ liability insurance are also considered. The additional requirements and restrictions imposed in liability insurance for motor vehicles will be considered in Chapter 22, “Motor vehicle insurance,” of this book.